Consider a younger partner in your SMSF

If you have a self-managed super fund (SMSF), there are good reasons to think about bringing in a younger person.

It’s not the right strategy for every SMSF, but it is definitely worth considering, particularly to extend the life of the SMSF.

The primary function of your SMSF is that it will fund your retirement, and all decisions you make should be examined with this in mind.

If you’re looking at ways to keep your SMSF going, then bringing in a younger member, with potentially many more working years ahead of them, can be a worthwhile strategy. And with a minimum of 12.00% of their salary directed into super, this can help with managing debt and other ongoing expenses, taking the pressure off cash flow.

This extra money can also assist the SMSF in funding retirement pensions for older members who have transitioned to retirement.

However, the key to whether this option will work for you depends on how member balances are treated within the SMSF so some structural planning is necessary.

The financial contributions of the new member to the SMSF may open up opportunities for greater diversification of the share portfolio. It might also open up the opportunity to invest in property. Ben Rossi, First Financial Principal explains:

“Specific physical property as an investment is generally still only available to an SMSF, but it can include your commercial premises, which brings obvious benefits to those operating their own businesses.”

Because banks have tightened lending criteria across the board (SMSFs are no exception), introducing a new member to the fund might be the solution you’ve been looking for… it will make you more attractive to the lenders.

“If you can ‘pool’ your super assets with others within the SMSF, this might just mean you can buy something bigger than you could otherwise… because it increases your SMSF’s ability to borrow and service a larger loan.”

Another important consideration is that younger members will be able to carry on the management of the SMSF as older members look to retire, or start to work part-time and slow down in preparation for an exit from the workforce.

Having a younger member will enable a more seamless transition of the day-to-day management and overall responsibilities of the SMSF to allow it to continue. Younger members can also bring fresh investment ideas and opportunities to the table… and perhaps even find efficiencies in the way the SMSF fund operates while still ensuring that it is compliant and running smoothly.

It’s also important to consider that a younger member can be given the power of attorney to act for older members, if for any reason the older members become incapacitated and cannot do this themselves.

There is a lot to think about. And of course, there are advantages for the younger members joining the fund, too. Ben elaborates:

“Many funds charge a percentage based administration fee, determined by the level of assets. As the balance goes up, so too does the fee. In an SMSF, these costs can be fairly static and the difference for assets of $500,000 or $800,000 isn’t very much. For younger people with quickly growing balances, this can be a cost advantage.”

Joining an SMSF means being able to take an active interest and ‘hands on’ role in managing their own superannuation as a trustee. It’s also an opportunity to learn valuable investment and financial skills they might not otherwise gain.

If bringing in a new, younger member is an option your SMSF members are open to, then there are important factors to debate robustly. Existing trustees must be comfortable about the person joining. If this is a family member it tends to be less of an issue. But even so, it’s important to conduct all the appropriate checks and balances, including whether the younger member is equipped and informed enough to take on the responsibilities that may lay ahead.

“It’s not uncommon to hear about disputes and drawn-out court battles over how benefits are divided after a member dies; this can be avoided with solid estate planning,” says Ben.

“Tailored estate planning as well as insurances can be structured in such a way that it’s very clear what happens in any number of eventualities. In fact, often SMSFs allow for much more detailed estate planning solutions that can provide unique benefits on death for those with young families that are otherwise not possible.”

It is relatively simple to add a new member to your SMSF, but ensure it’s minuted and all the declarations are signed. You must also inform the ATO.

Importantly, you need to be 100% comfortable with any new members you are considering to add. They will have a say in how things are run and if not done properly, they may end up having power to do things you didn’t envisage – like direct benefits down the track. So careful planning and structuring is vital.

Obviously, each SMSF will be different so the risks versus the benefits need to be weighed carefully, and it’s a decision that shouldn’t be rushed.

SMSFs are governed by complex legislation and there have been changes in recent years, so it’s wise to seek professional advice specific to your circumstances.

If you like to find out more, contact our team today. Read more Superannuation articles.